Investing in a massive coal-burning power plant in southern Illinois has saddled some towns with similarly large electricity rates
September 04, 2013|By Michael Hawthorne, Chicago Tribune reporter
Across the nation, cities are taking advantage of deals for cheaper electricity made possible by low-cost natural gas. But not in five Chicago suburbs and more than 200 other Midwestern towns that made a big bet on coal.
Almost every month, Batavia, Geneva, Naperville, St. Charles and Winnetka are among dozens of municipalities feeling the sting of their decisions to finance the Prairie State Energy Campus in southern Illinois.
The promised savings simply have not materialized.
“Now THAT was expensive,” a Winnetka village engineer wrote in an email responding to a recent power invoice.
Representatives of the affected cities say they still expect investing in the coal plant will pay off in the long run. But with Prairie State’s construction costs totaling $5 billion and natural gas prices expected to remain relatively low, these communities likely will pay higher prices for electricity for another decade, according to analyses for Batavia and the city of Cleveland.
Batavia, which signed up for more electricity than it ended up needing, will be selling excess power from the coal plant at a loss for years to come, according to a report prepared for city officials.
“In retrospect, we should have focused on a little more diversity in our portfolio,” said Gary Holm, the city’s director of public works.
The costly deals are affecting more than 2.5 million residents in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, Virginia and West Virginia whose cities belong to municipal power agencies that bought shares of the coal plant six years ago.
At the time, municipal officials saw Prairie State as a reliable, affordable source of electricity and locked themselves into 28-year contracts with a company formed by Peabody Energy, the nation’s largest coal producer. Peabody ended up with just a 5 percent stake in the plant after shifting most of the costs — and nearly all of the financial risks — to towns as small as 1,200 people.
The arrangement has drawn the attention of the Securities and Exchange Commission, which this year subpoenaed Peabody and municipal power agencies for more information related to Prairie State.
Today, many of the communities that bought into the coal plant are paying far more than neighboring cities for electricity, records obtained by the Tribune show.
According to monthly invoices obtained under the Freedom of Information Act, Naperville has been paying a monthly average of $75.04 a megawatt hour this year, for example.
By contrast, Chicago pays about $56 a megawatt hour through a deal city officials negotiated after voters approved a proposal for bulk purchasing of electricity, or municipal aggregation. Many other communities have secured even cheaper rates.
“Given current market conditions and forecasts, there is no question that Prairie State is not turning out to be a good deal for these communities,” said David Kolata, executive director of the Citizens Utility Board, a nonprofit group created by Illinois lawmakers to represent residential utility customers. “They locked themselves into power at a very high price when they could be doing a lot better out on the market.”
Homeowners and other ratepayers have largely been kept in the dark about the higher costs. Municipal contracts with the coal plant’s operator require “any information of a technical, commercial or business nature” be kept confidential from all but a few officials. Meeting minutes show that discussions about the plant mostly take place in closed-door executive sessions.
Critics contend that elected officials didn’t know enough about the project to make informed decisions, leaving cash-strapped communities struggling to cover years of extra costs while waiting for benefits to materialize.
“These people are car mechanics and insurance salesmen, not energy experts,” Batavia resident Betsy Zinser said of municipal officials. A former commercial banker, she has persistently raised questions about the coal plant at public meetings. “They were bamboozled by Peabody and the municipal power agencies,” she said.
Prairie State’s government investors continue to defend the project. In May they released an annual report that stated “the future of energy is here,” described critics as “cynics” and called the coal plant a “reliable, low-cost and stable source of electric power that is produced in a safe and environmentally responsible manner.”
In a statement, Peabody said it is cooperating with the SEC investigation and called Prairie State “one of the most transparent projects of its kind.” The company also predicted the power plant will be cheaper than other providers in the long run because its municipal owners avoided transportation costs by purchasing a coal mine next to the plant.
“After performing extensive research and investigating all options for new long-term power sources, they concluded that Prairie State was the right project and took an active role in the development of the facility,” wrote Vic Svec, a Peabody spokesman.
Naperville’s city manager, Doug Krieger, attributed the plant’s higher costs in part to mechanical problems that have sharply reduced its electrical output. Power agencies have been forced to buy electricity on the open market to make up the difference, even as they continue to pay off debt from building the plant.
“Is it a big difference? Yes, it absolutely is. But it’s not like we are looking at changing our rates based on one season’s worth of data,” Krieger said in an interview. “We still feel comfortable with our decision to take a long-term approach with Prairie State. We can weather what we see as a short-term hiccup.”
Naperville is paying the highest average rate of the five Chicago-area municipalities that buy electricity from the coal plant. Average rates for the other four are $73.62 a megawatt hour in St. Charles, $64.55 in Batavia and Geneva, and $55.24 in Winnetka, which gets credits for the use of a local power plant that helps meet demand.
Without the credits, Winnetka would be paying $71.05 a megawatt hour on average, records show.
Some cities and municipal electric agencies that financed Prairie State are shielding residents from the coal plant’s price spikes by dipping into bond proceeds and draining budget reserves, records show. As a result, some ratepayers haven’t felt the full brunt of the higher-than-expected electricity costs.
Others, including Geneva and St. Charles, are charging more through “adjustment” charges tacked on to electric bills. Batavia is doing both, allocating $2 million in reserves this year as well as assessing charges that have accounted for up to 10 percent of monthly residential bills.
In Ohio, records show, American Municipal Power has spent $20 million this year to hold down monthly rates for the coal plant that otherwise would have jumped as high as $121 a megawatt hour. The coal plant is still significantly more expensive than other providers in the portfolios of participating Ohio communities, including pollution-free wind energy.
Investor-owned utilities like ComEd are required to seek the approval of state rate-setting commissions before investing in a new power plant. But that wasn’t the case for the municipal power agencies in Illinois and Ohio that decided to buy into Prairie State six years ago, even as private investors were abandoning the project and dozens of other coal plants nationwide.
Peabody promoted Prairie State as a low-cost power provider and hedge against volatile market prices, according to minutes from city council meetings. The decisions to pay for the project drew little debate among elected officials and only a smattering of objections from citizens and environmental activists.
By the time construction began in late 2007, Peabody had raised the price tag from $2 billion to $2.9 billion. Ballooning costs for trained workers, steel and other materials drove the price to $5 billion by the time it began operating in 2012.
Rules planned by President Barack Obama’s administration to combat climate change could bring another financial setback. The coal plant, the largest source of greenhouse gases built in the United States in a quarter-century, churns more than 13 million tons of heat-trapping carbon dioxide into the atmosphere every year, an amount equivalent to adding 2 million cars to the nation’s highways.
The Tribune reported in 2010 that Prairie State’s construction overruns had forced municipal power agencies to take on more debt and would significantly increase the costs passed along to cities. The Illinois Municipal Electric Agency, or IMEA, an association of 33 cities that includes Naperville, St. Charles and Winnetka, estimated in bond documents that its electric delivery rates would be $63.40 a megawatt hour in 2013, up 30 percent from 2007.
Officials discounted the findings. “It’s still a good deal for us in the long term,” then-St. Charles Mayor Donald DeWitte said at the time. “There’s no way the cost of our power is going up 30 percent.”
Records show the average monthly delivery charge for St. Charles this year is 51 percent higher than in 2007.
St. Charles and Winnetka officials directed questions about their power bills to the IMEA, which owns 15 percent of Prairie State. The agency acknowledged that the consumer-friendly deals brokered by Chicago and other cities raise questions about its decision to invest in an actual power plant. But most municipal aggregation contracts are for one or two years and don’t guarantee long-term price stability, officials said.
“I don’t think our rates are excessively higher,” said Phillip “Doc” Mueller, IMEA’s senior vice president for government affairs. “In a year or two years or five years the value of our approach is going to be apparent. It may not be apparent today, but it is going to be very shortly.”
Other Prairie State members are scrambling to spread out the coal plant’s costs.
Batavia and Geneva belong to a separate organization, the Northern Illinois Municipal Power Agency, or NIMPA, that owns 7.6 percent of Prairie State. In June, the agency voted to raise rates for its member communities by 6.25 percent to $64.55 a megawatt hour, including $8.05 to cover higher-than-expected costs for the coal plant.
As recently as 2011, records show, the agency had projected rates at $52 a megawatt hour.
“We’re not happy about it,” said Richard Heinemann, a NIMPA attorney. “We’re in a turbulent phase. It’s challenging for the communities to absorb this. But we’re still confident the investment will pay off.”
Officials in both suburbs agreed.
“Geneva’s mix of resources does not take full advantage of the short-term windfall of the market low energy prices, nor does it suffer the cost of market high energy prices,” Kevin Stahr, a city spokesman, wrote in an email response to questions.
Said Holm, the Batavia public works director: “We’re doing everything we can to make it work.”
Invoices from Ohio-based American Municipal Power, the largest owner of the coal plant, break down the costs of each source of energy and provide the most dramatic examples of towns being stuck with expensive electric bills.
In May, AMP charged Galion, Ohio, $85.13 a megawatt hour to cover its share of Prairie State, a cost that would have jumped to $121.87 a megawatt hour had the agency not tapped into funds to stabilize rates. By contrast, AMP charged Galion $35.43 a megawatt hour for wind energy in its portfolio.
During the same month, AMP charged the city of Celina, Ohio, $87.31 a megawatt hour for Prairie State but just $39.90 for electricity purchased on the open market when mechanical problems forced the coal plant off-line.
The invoices largely confirm the findings of a study last summer by the Institute for Energy Economic and Financial Analysis, a group dedicated to reducing the nation’s reliance on coal and other nonrenewable sources of electricity. At the time, AMP and other municipal power agencies dismissed the study as “deeply flawed.”
“When is somebody going to go back to Peabody and say this is not what you promised?” said Sandy Buchanan, the institute’s executive director.
The City Council in Galion voted last week to ask Ohio’s attorney general to investigate how Peabody and AMP marketed the coal plant to cities.
AMP did not return telephone calls or emails. But in a memo to Galion officials last month, the agency said it never promised particular rates to communities and it fully disclosed potential risks.
“The idea that AMP has not been ‘transparent and above board’ regarding Prairie State is an insult,” the memo stated.
A small Missouri community, meanwhile, recently became the first Prairie State municipality to escape its contract. Marceline, the boyhood home of Walt Disney, had been paying more than $100,000 a month for its share of the coal plant — a huge expense for a city with an annual budget of just $8 million.
Under its new deal, Marceline sold its share of Prairie State to a municipal power pool and reduced its monthly payments to $22,000. The agreement, approved last month, is expected to save the city $6 million during the next five years.
“It’s going to help us immensely,” said City Manager Luke Lewis, who earlier this year called Prairie State a “toxic asset.” “We were to a point where we just couldn’t raise our rates any more.”